J.K. Lasser's Guide to Self-Employment: Taxes, Tips, and Money-Saving Strategies for Schedule C Filers

CHAPTER 4

Reporting Your Income

Payment Types Don't Matter

Alternative Payments

Where to Report Payments

What to Do about 1099s

What to Do When You Don't Get Paid

Losses

What's Ahead

There are only two basic tax rules you need to know when it comes to income you receive for your business services: You must report the income and it's taxable. These rules sound easy, but confusion still results in some cases.

It's important to appreciate that the IRS is on heightened alert about self-employed individuals' income reporting. The reason is the “tax gap,” which is the spread between what the government collects in revenue and what it thinks it should be collecting. The latest report puts the tax gap at $450 billion. The IRS believes that a good portion of this tax gap is attributable to self-employed individuals who fail to report all their income. You saw in Chapter 1 that as a Schedule C filer you face greater audit risk, so make sure you report your income to minimize your audit exposure and protect yourself in case you are nonetheless selected for audit.

Also recognize that not every year in business is a successful one. Profits are what you aim for, but from time to time you may find that your expenses exceed the revenue you generate. This results in a loss. From an economic perspective, you need to figure out why you experienced a loss and decide what to do about it. From a tax perspective, the loss may enable you to file for a tax refund from certain previous profitable years. ...